Lender pushing refinance options

Countrywide Financial Corp., stuck with tens of billions of dollars in alternative mortgages it cannot sell, is pushing customers to refinance into traditional loans that can be easily unloaded by the struggling lender.

The home-loan giant has set a goal of refinancing $12 billion of these exotic loans into uncontroversial mortgages, and has told its sales force to pull out all the stops to get the borrowers to go along, internal company documents show.

Countrywide has authorized employees to knock one percentage point off its usual loan-origination fees, to waive steep prepayment penalties on existing loans and to loosen certain other requirements that would normally apply. If that doesn’t work, salespeople are to quickly “elevate any/all issues” to their supervising vice president, a directive says.

The initiative is designed to give the Calabasas-based company loans that it can sell to government-sponsored home-finance behemoths Fannie Mae and Freddie Mac or loans that can be insured by the Federal Housing Authority or guaranteed by the Department of Veterans Affairs. Loans backed by the FHA or VA aren’t difficult to sell.

The cash-raising effort demonstrates the financially desperate circumstances that led Countrywide to accept a $4.1 billion takeover offer from Bank of America Corp. last week. It also shows how the subprime meltdown has transformed the mortgage industry.

Lenders once found eager Wall Street buyers and other private investors for sub-prime and other exotic loans, but that demand has dried up in the wake of surging defaults. If lenders want to sell the loans they make, they now generally must meet the standards of the big government-affiliated mortgage players, which for the most part don’t accept the kind of mortgages that helped propel the housing boom with features such as ultra-low “teaser” payments and little verification of income.

Calabasas, Calif.-based Countrywide said Wednesday that its refinancing initiative would give borrowers better rates and other terms while freeing capital for additional lending or other uses.

It’s unclear exactly what kinds of loans are in the $12 billion refinance stockpile, except that they are for less than $417,000 – the limit for purchase by Fannie Mae and Freddie Mac. A senior Countrywide loan officer described them as a “hodgepodge,” including many adjustable-rate mortgages with optional ultra-low payments made to prime borrowers with good credit who obtained them on a “stated income” basis – without documenting their earnings. Delinquencies on such “option ARMs” are rising rapidly.

Countrywide had always intended to sell the loans but got stuck with them when the market shifted.

“Countrywide is desperate to dump them to recoup the capital by refinancing them into marketable loans. It’s the equivalent of a manufacturer who gets stuck with a ton of unsold merchandise after the Christmas season,” the loan officer said. “So he says let’s liquidate the inventory.”

The documents describing the new refinancing program make clear that replacement loans must be “conforming” – adhering to the standards of Freddie Mac and Fannie Mae – or “government loans,” the highly documented mortgages that can be backed by the FHA or VA.

“You must figure out how to originate every loan as a Conforming or Government loan!” the instructions read. “Ineligible Loan Types: Do not originate!!!”

The instructions also spell out how to make computerized “exception requests” – attempts to win approval for loans that don’t meet regular standards for refinancings – and to contact supervising “sales leaders” to review the requests.

If borrowers ask why they are being pitched a new loan, loan officers are told to reply: “As you may have read in recent news articles, Countrywide is committed to ensuring our borrowers are in the best situation possible. We want to help you by determining if we can significantly improve your mortgage rate and payment.”